OptionNewbie, Blog Has moved

Although it might be a little early to invest in a domain, I didn't want to have to make a change later. I figure its easier to move when your small. Anyhow, my new blog is located at :

www.optionnewbie.com

What is next for the Dow?

Although the fed cut discount rates, I wonder how much that really affects the long term picture for the stock market. Discount rates really only provide a bail out mechanism for financial institutions. I wonder how much of Friday's bounce was related to a combination of short covering and financial sector recovery. The housing and mortgage issues will undoubtedly extend beyond what has been seeing these past few weeks. For the short term, I am looking to see if the Dow can clear 13,200 and hold the line. If not, I still see resistance at 12,500 and with that in mind there is potential to see another sell off. Only time will tell.

Fed cuts discount rate

A discount rate is good news and undoubtedly means that the banking sector will see an uptick today. What is in question is the mood of the market. Will this create a sustainable rally? The Dow did touch the 12500 support yesterday before bouncing. We are at a turning point and until more is revealed regarding the subprime issues its hard to tell where we stand. Regardless, the issues with subprime has made lenders nervous and the sudden restriction in lending standards has limited the market for sellers. Housing is in for a long recovery. I will be keeping and eye on Banking, Finance and Technology for the next 30-60 days.

Housing starts hit low

The US Census released housing starts today ( http://www.census.gov/cgi-bin/briefroom/BriefRm) . As I suspected, they were poor. It doesn't take a genius to figure out that this number was going to be lower. Although its never a good idea to trade on news, due to the volatility, almost all news is being taken negatively. I viewed this week as an opportunity to make bearish plays on builders.

Watchlist: CFC, ESS, AVB

Look Out Below! Dow going down!

Well, the Dow was showing resistance until today. This is a bad sign for the bulls and my previous hope, that we were looking at a bounce, has been replaced. The Dow is currently showing a point and figure price target of 12500. With housing starts and building permits being announced this Thursday, it could get ugly.

Energy Sector BP Reverse

The Energy sector presented a point and figure bullish reversal today. This is one technical indicator that I follow closely and I will be screening energy stocks looking for deals.

Watch List:

BP,RIG, PTR, NE, SU

Dow meets regular resistance

The Dow is forming a reliable looking price channel. As a result I am looking for the Dow to break through 13700 resistance or 13200 support. This next week should be interesting and assuming that the subprime gossip slows, I am guessing we will break through 13700 and march back up to 14000.

PreMarket Woes, Fed jumps in

Today I am paying attention, close attention to the pre-open market and after hours trades. Looks like wall street stocks are taking a hit. The Fed is lending money to banks for liquidity purposes and this certainly brings concern.

I think the slightest series of positive news could reverse this whole thing and it would be a good idea to stay close to the monitor. I plan to place some early stops and contingent orders. I have a few puts that should really take off but need to lock in the profits.

No! you can't have your money, BNP and Subprime

BNP
"Im sorry, you cant transfer funds today, all funds are on hold."
Client
"Why not."
BNP
"We made bad investments, we think."
Client
"So how does that affect me if you made the bad investment?"
BNP
" Well, we arent sure yet but you cant have your money until we figure this out."
Client
"What, well then, I guess I'll be taking my money somewhere else."
BNP
"Nice try, we arent giving you the money"

Dow up 287! So what happened to subprime?

Although the Dow appears to have bounced back from major losses on Friday, underlying indicators remain unstable. The bounce seems to have started with news from an S&P analyst regarding Bear Stearns. Meaning back at the ranch, the news and reporting related to subprime lending has suddenly gone silent.

read more digg story

Hedge Fund Gambling, Bear Stearns COO Resigns!

1.5 Billion dollars of investor money has been lost and the COO resigns. This smells of Enron and nobody knows the real story. An AP article released today states "Bear Stearns made wrong-way bets". Nice to know that reputable market makers are in the habit of making bets!

read more | digg story

S&P 500 losing ground, So much for large cap

All markets took a beating today but I
wanted to point out that the S&P500 broke its last resistance on July 31st (see my blog entry). Is the next stop 1360? Technicals rarely lie, particulary when they are supported by reliable measures of market volatility such as the volotility index (VIX). Predicting the future is not my specialty and rarely is it worth the effort to proclaim an ability to predict. What is the bottom line? The technicals definitely support the bear.

Ambac Financial (ABK), leading the S&P500 dogs with a -6.47% loss on the day.

Detecting Liars

Seeking out the worst in people is a dangerous course. I think this article " how to detect bullshit "has some good ideas and everyone should exersise caution from time to time but if you look for liars, you will find them. Additionally, not all forms of BS are bad, softening the blow of the truth can be a necessary evil. I dint want to visit the doctor and be told "your going to die". I would prefer something like " Although you chances of survival are low, we have many new successful treatments for your condition". Like everything in life, balance and good judgment are key.

How the EPA ruined the auto industry

I am going to go out on a limb and say that auto sales are going to continue to perform poorly. As long as oil prices continue to rise against a weak dollar, can we expect more of the same? Everyone I know is sick of driving an hour to work and paying double the price for fuel. Unfortunately, all the vehicles made today are major gas guzzlers and oh, by the way, the EPA estimates have been incorrect forever.

http://autos.yahoo.com/green_center-article_153/

DOW Positive, For Now....

Although the DOW finished on a positive note today, fewer stocks are out of the red. Decliners outpaced advancing stocks accross the board. Smart money remains in cash, well at least 75% or more.


http://finance.yahoo.com/advances

Results Come From Action

Great article about the difference between talking about something and doing something.

read more | digg story

S&P 500 Breaks Resistance

Stockcharts.com

The S&P 500 closed at 1473.91 breaking most recent resistance levels from May and June. We could be headed toward the lows from March and potentially break 1400.

NFI - Failure to Deliver Threshold for 18 months!

NFI, an NYSE listed stock, met the failure to deliver thresholds on or before January of 2005. How in the world does a stock fall into this situation for so long, unchecked?

http://www.nyse.com/regulation/memberorganizations/Threshold_Securities.shtml?date=20050110

The Crime of Naked Short Selling

It has come to my attention that NFI may have fallen victum to the rumored Naked Short. Reading this information and other data regarding Naked Shorts should scare anyone away from the unregulated OTC stocks. An explanation found on the SEC website as follows:

http://www.sec.gov/

II. "Naked" Short Sales
In a "naked" short sale, the seller does not borrow or arrange to borrow the securities in time to make delivery to the buyer within the standard three-day settlement period. 3 As a result, the seller fails to deliver securities to the buyer when delivery is due (known as a "failure to deliver" or "fail").

Failures to deliver may result from either a short or a long sale. There may be legitimate reasons for a failure to deliver. For example, human or mechanical errors or processing delays can result from transferring securities in physical certificate rather than book-entry form, thus causing a failure to deliver on a long sale within the normal three-day settlement period. A fail may also result from naked short selling. For example, market makers who sell short thinly traded, illiquid stock in response to customer demand may encounter difficulty in obtaining securities when the time for delivery arrives.

Naked short selling is not necessarily a violation of the federal securities laws or the Commission's rules. Indeed, in certain circumstances, naked short selling contributes to market liquidity. For example, broker-dealers that make a market in a security4 generally stand ready to buy and sell the security on a regular and continuous basis at a publicly quoted price, even when there are no other buyers or sellers. Thus, market makers must sell a security to a buyer even when there are temporary shortages of that security available in the market. This may occur, for example, if there is a sudden surge in buying interest in that security, or if few investors are selling the security at that time. Because it may take a market maker considerable time to purchase or arrange to borrow the security, a market maker engaged in bona fide market making, particularly in a fast-moving market, may need to sell the security short without having arranged to borrow shares. This is especially true for market makers in thinly traded, illiquid stocks such as securities quoted on the OTC Bulletin Board,5 as there may be few shares available to purchase or borrow at a given time.

Financial Sector Continues to Suffer

The financial sector is still taking a beating despite today's rally. The bullish percent chart, from Stockcharts.com, tells the whole story. One stock I found interesting while scanning the sector was NFI, Novastar Financial, which is down from $70 to $12 in under six months. That is really scary. It makes me wonder if small mortgage finance companies like this are just used by the big boys to dump bad debt? Whish I had a naked put on this baby back in March.

Dow’s 520 point two-day loss: correction or calamity?

Down, down, deeper and down”. So goes the chorus of a Status Quo song, but it is eerily starting to sound like the stock market’s anthem. When writing an article on Thursday’s 312 point drop in the Dow Jones Industrial Index I did not quite contemplate market circumstances requiring a sequel so soon thereafter.

read more | digg story

Trading Methodology

Stock Selection

In order to maximise consistency there must be a process. In every part of life, creating and following repeat processes allows for consistency and easy error detection/correction. This does not eliminate the need to experiment but each little laboratory event must be documented and to the extent required to be repeatable. After all, if its successful, I would like to be able to do it again.

I have to give credit to Sean and Jim, http://www.twoguysandyourmoney.com/ , for providing the foundational method for determining market risk. If you want some excellent information on how to evaluate market strength, then sign up for their newsletter. You can also listen to them on the Internet http://www.kfnn.com/ at 5pm (GMT -7) . I don't believe these guys would ever play options but that's probably because they are professionals and I am just an optionnewbie.

My selection methodology

Analyze overall Market condition using bullish percents.

• DOW, NYSE, NASDAQ, S&P

Evaluate Industry and Sector strength (offense or defense) .

• Transports, Finance, Telecom, Etc...
• Determine the sector status, bull (offense) or bear (defense)

Select stocks that trade above 100 within selected sector(s) and determine analyst ratings (buy or sell)

• Use stock scans and find optimal targets

Analyze technical charts starting with Point and Figure (P&F) then candle with MACD, RSI and Chaikin (CMF)

• Look at P&F Bull vs Bear, price objective and signals (triple top etc)
• Evaluate Candle chart with at least three of four indicators confirming the likely direction
• Determine if the play would be a call or a put (short or long)

Review earnings calendar and determine if there is a pending eranings announcement that might influence the trend.

Review the Economic calendar for potential trend affecting news.

Avoid stocks that have news or potential economic impact or gamble and hedge against the unknown.

My next step is going to involve selecting the option technique. At this point I haven't thought much past naked puts and calls. More to come with this strategy.....

Option Selection

I believe that most swing traders stick to a select number of stocks. I think that this is related to the predictable nature of certain stocks that float between support and resistance levels with predictable fequency.

It seems that this is a sound method for options trading as well (time will tell). Options are a little different as the price per contract needs to be considered and you can see that I have selected rather expensive equities. This allows me to control more money at a lower price per contract. Below is my paper trading list and likely to be my actual stocks when I begin my investment method.

Initial Stock Option List:
ACL, BA, BBH, CME, CMI, DECK, GOOG, MLM, RTP, SHLD, STRA

In the begining

If you are interested in becoming wealthy, then you need to seek out wealth and take risks. The higher the risk, the greater the reward and potential financial return.

There is however, a difference between taking educated risks and trying to get lucky (gambling). I have read most of the books, practiced paper trading and watched financial news in religious fashion.

Oddly enough, the DOW is down 500 points and I want to jump in! Why, becuase a good trader can make money in any market. The market has been on a four year up trend and almost unstoppable until this week.

I have been researching, reading and absorbing as much stock market and trading information as I can for alsmost two (2) years. Now, its time. I am going to track my failure and success on this blog. Anyone who cares or is following a similar path is welcome to join in this adventure.

Now, how much mmoney shall I risk and when should I start?